The logo of the UNESCO is seen inside at the headquarters in Paris on September 22,2009.

PARIS | Thu Oct 11, 2012 9:50am EDT

PARIS (Reuters) - UNESCO is in its "worst ever financial situation" after its biggest contributor the United States froze funding last year, the director general of the United Nations' cultural agency said on Thursday.

The United Nations Educational Scientific and Cultural Organization was plunged into crisis in October 2011 when Washington, an ally of Israel, cancelled its grant in protest at the body's decision to grant the Palestinians full membership.

The U.N. body had been forced to slash spending, freeze job hires and cut programs after losing the U.S. funding, which had made up 22 percent of its budget, UNESCO's Irina Bokova told reporters.

The organization, which designates World Heritage sites, promotes global education and supports press freedom among other tasks, had started the year with a deficit of $150 million out of $653 million for its budget over 2012 and 2013, Bokova said.

"It's crippling our capacity to deliver," she added.

"We are coping in very difficult circumstances. We're fundraising this year, but it's not sustainable on a long-term basis. We're not closing UNESCO, but member states will have to rethink the way forward. UNESCO will be crippled."

U.S. legislation prohibits funding to any UN agency that grants full membership to any group that does not have "internationally recognized attributes" of statehood.

As a result of the vote on the Palestinians, the U.S. administration, which pays its dues at the end of the year, immediately withdrew its funding to the Paris-based agency.

Among projects to be hit by the change in U.S. policy were a Holocaust education program that is linked to wider campaigns on human rights and genocide and a Tsunami research project, both of which had been directly financed by Washington.

Bokova said it was in U.S. interests to be part of UNESCO and hoped Washington would review its position before next year when it would be stripped of voting rights for not paying its dues.

"There is money in the world, but it's not just about money," Bokova said. "We need the United States to formulate common policies and to debate common values."

Bokova, who took her post three years ago, said the deep cuts UNESCO had been obliged to make were affecting the way it did business. It did not replace 336 jobs amounting to about 15 percent of its total workforce, cancelled projects and slashed expenses.

To compensate for the shortfall, UNESCO created an emergency fund to obtain cash, primarily from other members, that is allocated to projects as it wishes.

The 60-year old former Bulgarian foreign minister said she had managed to raise $69 million, including $20 million each from Saudi Arabia and Qatar, as well as smaller donations from countries including Turkey, Indonesia and Algeria.

It has also received specific project funding from countries that have particular interests in certain fields. On Thursday it is due to sign a $20 million agreement with Norway for education and sustainable development programs.

"It fills gaps, but not in the long-run. We need a predictable budget," she said. "I think UNESCO was caught in between the political turmoil of the Middle Eastern conflict. I think it's unfair."

(Reporting by John Irish; Editing by Anthony Barker)

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